Don’t be overwhelmed or play it too safe when it comes to investing and living.
In this episode you’ll learn:
- Why having too many choices is overwhelming.
- Why being overly safe in your investing might actually be losing you money.
- How to keep investing from being overwhelming.
- Why we need to have doubt and uncertainty to prevent overconfidence.
- Why we sometimes need help with our investing.
Show Notes
Why Too Much Choice Is Stressing Us Out – The Guardian
The Paradox of Choice – Why More Is Less by Barry Schwartz
Martin Wolf’s interview with Ben Bernanke – Financial Times
Superforecasting: The Art and Science of Predicting by Philip E. Tetlock and Dan Gardner
A Field Guide To Getting Lost by Rebecca Solnit
Tribes: We Need You To Lead Us by Seth Godin
It Might Not Work blog post by Seth Godin
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Summary Article
When I lived in Cincinnati, the airfares were notoriously pricey given it was a major airline hub at the time.
Consequently, I would on occasion park my car at the Cincinnati airport, pick up a one-way rental vehicle, drive to the Lexington, Kentucky airport, take a flight back to Cincinnati and then continue on to my final destination.
On my return, I would get off the plane in Cincinnati and drive home.
This ridiculous itinerary would often save $600 or more on my airfare.
The Lexington airport is not situated by a major interstate highway. It is west of the city along a somewhat rural route.
On one of my trips to Lexington, I decided to leave Interstate-75 that connects Cincinnati to Lexington and take a short cut.
This was before the iPhone and its built-in GPS, and I didn’t have a GPS unit in my rental car. Nor did I have a map. All I had was a general sense of where the airport should be given I had been there previously.
The landscape was beautiful as I drove through the rolling blue grass hills lined with white and black fences to keep in the horses.
Those picturesque hills also meant there were a lot of confusing curves and turns in the road. My chosen route would often dead end, requiring me to choose to go left or right.
Lost But Not Completely Lost
After thirty minutes of driving, it became clear I was lost. It was a cloudy day so I couldn’t get my bearings by following the sun. I just kept driving, hoping I would see the airport tower or run into a major highway
After forty-five minutes, I began to panic as the boarding time for my plane was fast approaching, and I was still hopelessly lost.
Another thirty minutes passed before I finally found the airport, but by then it was too late. I missed my flight, and sheepishly had to call my client to tell them I needed to cancel our dinner plans as “my flight had been delayed.”
Although I was lost, I wasn’t completely lost. I knew I was in Kentucky in the general vicinity of the airport, even though I didn’t know exactly where I was.
While I started out confident, I was soon plagued with too many choices of roads to take and directions to drive. When I came to an intersection, I didn’t know whether I should go left, right or continue straight ahead.
Daniel Boone said, “I was never lost in the woods my whole life, though once I was confused for three days.”
That was me. Not completely lost. Just confused.
Too Many Choices
Having too many choices is one reason we get lost or confused.
Barry Schwartz in his book The Paradox of Choice shares a study in which researchers set up displays of jam at gourmet stores. The customers were given samples and a one-dollar off coupon. One display had 24 varieties of jam. The other had only six.
30% of people who visited the smaller display bought jam while only 3% of those exposed to the larger jam selection purchased as they were overwhelmed by too many choices.
Too many choices can also negatively impact our investing.
Schwartz mentions a study conducted by Vanguard, the mutual fund company, who found that for every ten mutual funds an employer offered in a work-sponsored retirement plan, the employee participation rate dropped by 2%, even though the employees were passing up matches as high as $5,000 per year.
Overwhelmed With Investment Options
I often receive emails from individuals overwhelmed with the many choices of investment strategies. Should they buy individuals stocks, invest in options, buy precious metals, outsource to an investment advisor, invest in index funds or buy ETFs?
We feel lost when we have too many choices because we are uncertain which is the right choice. We want to choose the option that will best meet our needs and make us happiest while avoiding the feeling of regret if we end up making the wrong choice.
When it comes to investing, we want the investment that has the greatest certainty of achieving our targeted return and where there is minimal risk of losing money.
Unfortunately, the days of achieving a safe 4% to 5% return are gone at least for now, given how low interest rates are.
Ben Bernanke, former chairman of the Federal Reserve, related how two of his mentors used to say, “If you never miss a plane, you’re spending too much time in airports.”
Bernanke interpreted this to mean, “If you absolutely rule out any possibility of any kind of financial crisis, then you’re probably reducing risk too much, in terms of growth and innovation in the economy.”
From an investing perspective in today’s climate, that airplane metaphor means if you rule out any possibility of a loss in your investing, then you are probably reducing risk too much, and your portfolio will not even keep pace with inflation.
That means your portfolio might seem safe, but it is actually losing money on a real or inflation-adjusted basis.
In short, we have to embrace the uncertainty of being lost when it comes to investing. Of not knowing what the exact investment outcome will be.
Keep It Simple
We can reduce the overwhelming feeling that uncertainty brings by doing what the academic researchers did. We can keep the selection of jam small.
In investing, that means focusing on assets and asset allocation.
Instead of trying to pick individual stocks, options or currencies, keep your investment approach simple by allocating among a variety of asset types, using low cost index funds and ETFs.
Diversify among a wide variety of asset categories and learn what drives the return of those assets over time so you can have reasonable return expectations.
In order to know how much you need to save for retirement, you need to know how much you can earn investing. And to know that you need to understand assets and asset allocation.
